Partner PoV

Quick, entrepreneurs, use the force because Darth Venture is after you. How do I know this? I recently attended an MIT forum, at which entrepreneurs, venture capital providers and service providers met to discuss technology, business and capital. The MIT forum, along with the Central Coast Venture Forum, TechBrew and the Center for Engineering Entrepreneurship Management at UCSB, are vital, growing organizations that prove this is a fertile and exciting region. (If you have not attended any of these events, and this is an area of interest, then I strongly urge you to do so).

At DFJ Frontier, a seed and early stage venture capital firm and the newest fund in the Draper Fisher Jurvetson network, we see a tremendous opportunity in this central coast region. From Westlake all the way up to Santa Cruz, you’ve got top-notch educational infrastructure, smart workforce, models for success and great places to live. The only thing missing to date has been efficient access to capital. What did Silicon Valley look like 25 years ago? I was there - prune orchards, horse fields, Stanford and HP - and a few venture capital companies. Here on the coast today, you’ve got all kinds of orchards and horses, UCSB, Cal Poly, and models for success like Green Hills Software, Xylan (now Alcatel), United Online and many more.

That’s why we’re here. Venture capital catalyzes business, creates jobs and wealth, and as we still see in Silicon Valley today, promotes additional venture capital dollars. This will continue, and in fact has, save for two or three strange years that most of us would like to forget. Those years were the anomaly; we should be back on track shortly.

At the MIT forum, we heard from an inspiring local entrepreneur, Dan O’Dowd about his terrific history as founder and CEO of Green Hills Software. Dan is one of the guys doing it right in my opinion. He referenced other entrepreneurs who are doing it right, guys like Bill Gates, Michael Dell, etc. What are they doing right? They started their companies with a small amount of venture capital, and proceeded to run their businesses well and never looked back. These heroes are examples for today’s entrepreneurs and just the types of women and men we venture capitalists like to support.

Dan stressed that making more money than you spend means you do well. Spending more money than you make is a bad thing. While moronically simple, he is dead on in pointing this out and questioning why others don’t use this simple business model more often. Use the force Luke! Heck, my immigrant grandparents taught that one to us many years ago. That’s how they built a business teaching twenty-five cent music lessons into a chain of fourteen music schools. Remember: don’t spend more money than you make…you won’t do well and Darth Venture will come calling for more of your company.

Dan cautioned that when entrepreneurs raise progressive rounds of venture capital to drive faster growth, this capital comes with a cost. An entrepreneur sells a little bit (or sometimes a lot of bit) of the company in each venture round. Why does Dan think this is bad? Because if capital and growth are not used wisely, one can lose control of employee training, product development, and ultimately the company, as venture capitalists can own as much as over 50% of the company at the time of an IPO. Again, entrepreneurs like Dan, Bill and Michael each used very little venture capital, and then succeeded by making more money than they spent. They used the force to keep Darth Venture under control.

After Dan spoke, we then listened to a terrific young Santa Barbara-based company called Warp 9 tell its story, after which Dan joined me and Sumant Mandal from Clearstone Venture Partners (Darth Venture was in the house) on a panel to talk about Warp 9 specifically, and venture-backed companies in general. I give Jon Lei, the CEO of Warp 9 a lot of credit for his courage and poise during our questions, challenges and recommendations. The audience chimed in too, asking tough questions and helping mold a better battle plan for this new startup. One audience member asked Darth Venture why we don’t wait long enough for Warp 9’s market opportunity to dwindle, and then exploit such market timing to rush in for a better-timed venture capital kill. Wow.

I guess Darth Venture’s reputation preceeds him. Wait. Dan used venture capital. So did Bill, and Michael, and a host of other successful entrepreneurs. But they used it the right way. They used the force, Luke: they got a small venture kick-start and then made more money than they spent. Salient message in tough times. Salient message in boom times too in Darth Venture’s humble opinion.

Dan argued vehemently that the recession is at its nadir, and good times are ahead. I agree. Darth Venture isn’t always on the dark side. Darth Venture has helped Dan and many others use the force with terrific results.

We’re excited about the huge growth potential in this region. We want to help more local entrepreneurs become heroes, and catalyze job and wealth creation. Catalyzing this success will drive more venture investment in the region. Luke, get in the game, Darth Venture isn’t such a bad guy, and may the force be with you.